Minimum Wage Often Transfers Wealth Away From Poor

by Ari Armstrong, October 4, 2006

There ain't no such thing as a free lunch. This saying, popularized by Robert Heinlein and Milton Friedman, summarizes a basic tenet of economic thinking. It implies, among other things, that when left-wing political activists promise a higher minimum wage for the poor, without apparent harm to anyone, we should immediately look for the hidden costs.
Wealth doesn't appear out of thin air, and government interventions in the economy generally result in unintended harmful results. Amendment 42, which would raise the minimum wage in Colorado, is no exception.

Because Amendment 42 calls for a dramatic one-third increase and ties annual increases to an index of inflation that's unrealistic especially for rural areas, Amendment 42 would be particularly harmful. By altering the state's constitution, Amendment 42 would also inflexibly micromanage business activity.

More wealth is produced as people build more machines, tools, and factories and gain better knowledge and skills. Wealth is not produced by some magical stroke of a lawmaker's pen. A minimum wage law cannot produce more wealth. It can only forcibly redistribute wealth from some people to others. It so happens that in several ways the minimum wage transfers wealth away from the poor.

The common argument among most economists is that, by increasing wages for those workers beyond market levels, many such workers are priced out of a job. If you were an employer, would you pay $6.85 per hour to an employee who contributes only $6 per hour? Sure, a minimum wage increases wages for some among the poor, but it also decreases wages for others, all the way to zero.

Economists Thomas MaCurdy and Frank McIntyre summarize the standard view: "one purchases less of a good," or in this case labor, "as the price rises." Can you think of something you buy more of because its price rises (other things equal)? These economists note that "mounting evidence... continues to support the strong theoretical predictions of negative employment effects (at least in the long run)" of a minimum wage.

The folks at the Bell Policy Center disagree. They claim that federal minimum-wage hikes "resulted in no systematic or significant job losses," and state laws resulted in "little to no job losses." However, of the five sources cited by the Bell on this point, only two are remotely respectable. The other three, published by left-wing outfits similar to the Bell, offer simplistic before-and-after claims about state employment that prove nothing about the impact of the minimum wage.

Of the Bell's two serious citations, one discusses only a sample of fast-food restaurants in New Jersey and Pennsylvania -- hardly representative. Unsurprisingly, that study has been widely disputed. The other claims that national minimum-wage increases in 1996 and 1997 resulted in no statistically significant job loss. One problem with such studies is that minimum-wage earners make up a tiny part of the total labor pool, so employment impacts of a hike in the minimum wage easily get lost in the statistical noise.

Job loss is not the only risk for low-skilled workers, though. With a minimum-wage hike, some low-skilled workers would suffer from reduced benefits such as on-the-job training. Generally businesses voluntarily offer non-monetary benefits when those benefits are worth more to the employee than they cost the business. But if businesses are forced to pay (and employees are forced to accept) more money, the result may be fewer benefits and a lower total value of compensation. Some businesses may also cut hours of employment.

Yet, for the sake of argument, MaCurdy and McIntyre simulate what would happen under a minimum wage if there were no loss of jobs, hours, or benefits. There are only two other options: businesses can take a hit in profits, something these economists see as rare, or businesses can pass the costs to consumers by raising prices.

Only a fraction of poor families would benefit from an increase in the minimum wage (a point the Bell admits), while many rich families also "have a low-wage worker," MaCurdy and McIntyre note. So a minimum-wage hike that increases prices would at the same time transfer wealth to some rich families (through the wage hike) and leave most poor families poorer (through the increase in prices).

Most low-skilled employees, who usually contribute only part of a family's income, soon gain the skills they need to demand a higher wage. Low wages are the result of low productivity. The best way to increase productivity is to increase work experience -- the very thing that a minimum wage undermines.

There's no such thing as a free minimum wage.

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Ari Armstrong, a Senior Fellow at the Independence Institute, earns less than minimum wage writing about politics for FreeColorado.com and other publications.

The Independence Institute has also made available additional discussion about the economic consequences of the minimum wage law; see the brief and paper by economist David Neumark, published by the Show-Me Institute.

The Bell's paper as well as the study by MaCurdy and McIntyre are available online.